When seeking to fund your business, venture capital is an excellent option. You present your company to a small panel of investors and, if they like what they see, then they’ll give you money to build and grow it. Simple, right?
Except in the business world, things are rarely so straightforward. Even if you manage to pitch successfully, you're not home and dry; while it may be tempting to take the first six-figure cheque that comes your way, there are certain things that you first need to consider.
For instance, if there are personal compatibility issues between you and your investors, this could negatively affect your fledgeling company. You also need to stop and think about what taking such an advanced step might mean for your business, especially if you are unsure of the direction it will take in the long term.
Therefore, before you do anything, it’s wise to take a step back. A good place to start is by looking at the advantages and disadvantages of acquiring venture capital, which we will do so here.
Advantages of Venture Capital
As discussed, for many businesses, venture capital is a great choice. Funding your startup this way can be an integral step towards scaling, adding value or diversifying operations and, with the right guidance, your profit margins can snowball.
Venture capital will also provide additional resources for expansion that may not have been available through other means, as well as expose business owners to valuable new contacts.
Here are the pros of venture capital:
The most obvious benefit is that venture capital provides you with significant additional resources. This additional capital will enable your company to cover the purchase of various assets and other startup costs all at once, effectively accelerating the growth of your company.
Of course, immediate access to so much spending power can be overwhelming, or even create an inflated sense of financial empowerment; therefore, it is vital to maintain a strong sense of responsibility when handling these new funds to avoid overspending or wastage.
Venture capitalists (VCs) often have access to high-quality connections that will drive business your way and, once a VC has become invested in your company, it will be in their best interest to take advantage of this. By introducing you to key figures, you can then learn to monetise your network.
Without a VC to act as an intermediary, these types of connections are rarely available to small businesses and startups, making them worth their weight in gold.
Your investors (or, at least most of them) did not find themselves in a superior financial position by sheer luck; indeed, the vast majority of VCs have built up seriously impressive business portfolios to arrive at such a position of authority.
Therefore, in addition to their financial clout, your business investors may also be interested in offering you their expert advice. This business insight can be invaluable in itself, helping you to successfully navigate both your industry and the business world in general.
Disadvantages of Venture Capital
As previously discussed, utilising venture capital does not come without its drawbacks, though. When you allow investors to purchase a stake in your company, you are essentially allowing another entity to have a say in the moulding of your company – and it won’t always necessarily be something that you agree with.
To avoid, or at least mitigate such negative repercussions, be sure to understand the risks, as well as thoroughly research the CVs or angel investors you intend to approach.
Here are some of the drawbacks of venture capital:
Loss of Control
When funding your company or startup with venture capital, you will transfer a portion of control to the investor. What this means is that you will no longer hold 100% of the decision-making power.
Of course, if you have committed to an investor that does not share your vision and values, then this can quickly become a problem. Indeed, if you have opted to sell over 50% of the company shares to a single VC, then you will no longer retain majority control, and their decision will take precedence.
To avoid this, you should always remember that the best financial offer may not always be the best offer per se; selecting a VC that is on your wavelength is far more critical than who offers you the biggest cheque.
By their very definition, VCs will only provide capital if the company is likely to provide a desirable return on investment. Therefore, it’s fair to say that, in most cases, profitability is the top priority, particularly if they are keen to see a quick return so that they can re-invest in other projects.
In such cases, you may be better off seeking the services of an angel investor, or other external investors who are motivated by social, philanthropic or ethical reasons.
Potential Harm to Reputation
As previously mentioned, doing your research before pursuing any deal is essential. After all, the decision to allow another entity control over your company can make or break your company’s mission statement, so be sure to look into other companies that your target VC firm has invested in first.
How are those companies performing? Have they experienced significant and consistent growth? Are they innovative in their offerings and operations?
If you don’t like what you see, or if a particular pattern keeps emerging, then it might be best to look elsewhere, particularly if you have a precise vision for your company.
Lack of Attention
After signing a financing agreement with a VC, management of the company will become more complicated, as it multiplies the amount of input for decision making by the number of stakeholders.
Instead of being able to make business calls single-handedly, any major decision will need to be discussed and approved by stakeholders, resulting in potential conflict as well as a more bloated decision process.
It’s also worth bearing in mind that your investors will have an array of other projects and businesses that will be taking up their attention, and while the running of your company might be your sole focus, this isn’t the case for everyone else. This lack of focus can be particularly frustrating when you are trying to action something, and you need approval from all investors.
Remember: the amount of energy you expend working with investors can often detract from your actual day to day engagement with the company’s operations, inadvertently harming profitability and growth in the long term.
As you can see, venture capital is not as clear cut as selling an idea and receiving a cheque. However, while there are numerous angles that you have to consider, it primarily comes down to this: would you prefer to be the sole owner of a smaller business, or a partner in a larger, potentially more successful company?
If you’re still not sure, then consider the other financing options that are available to you, such as crowdfunding, grants and microloans, before deciding to pursue venture capital.
What are your thoughts on venture capital? Let us know in the comments below.